M.A. PREVIOUS ECONOMICS

PAPER IV (A)

ECONOMICS OF SOCIAL SECTOR AND ENVIRONMENT

BLOCK 2

ECONOMICS OF NATURAL RESOURCE MANAGEMENT AND SUSTAINABLE

DEVELOPMENT

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PAPER IV (A)

ECONOMICS OF SOCIAL SECTOR AND ENVIRONMENT

BLOCK 2

ECONOMICS OF NATURAL RESOURCE MANAGEMENT AND SUSTAINABLE DEVELOPMENT

CONTENTS

Page number

Unit 1 Management of natural resources 4

Unit 2 Sustainable development and environment 24

Unit 3 Macro economic policies and environment 38

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BLOCK 2 ECONOMICS OF NATURAL RESOURCE MANAGEMENT AND SUSTAINABLE DEVELOPMENT

The aim of this block is to present certain theories and approaches to natural resource management and sustainable development which is an important area of concern for decision makers in the area of environmental economics.

First unit deals the basic concepts of management of natural resources. It focuses on Management of renewable resources; Renewable energy commercialisation and theories and approaches pertaining to non renewable or exhaustible resources

Unit 2 discusses propositions to sustainable development and environment. Unit throws light on scope and definitions of sustainable development; Sustainable development in economics; Sustainable development in India and tradeoffs between environment and development

Unit 3 presents to you the macro economic policies and environment. Fundamental issues of macroeconomics and sustainability are discussed followed by revised microeconomic theory and policy for the 21st century. Concepts related to environmental and economic accounting are explained in detailed along with the discussion on environmentally corrected GDP.

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UNIT 1

MANAGEMENT OF NATURAL RESOURCES

Objectives

After studying this unit you should be able to:

Define the approach to management of renewable and exhaustible resources Understand the commercialization of renewable energy

Know the concepts and theories related to non renewable and exhaustible resources.

Structure

1.1 Introduction1.2 Management of renewable resources1.3 Renewable energy commercialisation1.4 Non renewable or exhaustible resources1.5 Summary1.6 Further readings

1.1 INTRODUCTION

Natural resource management refers to the management of natural resources such as land, water, soil, plants and animals, with a particular focus on how management affects the quality of life for both present and future generations. Natural resource management is congruent with the concept of sustainable development, a scientific principle that forms a basis for sustainable global land management and environmental governance to conserve and preserve natural resources.

Natural resource management specifically focuses on a scientific and technical understanding of resources and ecology and the life-supporting capacity of those resources. The term Environmental management is also similar to natural resource management. The Natural resource management emphasis on sustainability can be traced back to early attempts to understand the ecological nature of American rangelands in the late 19th century, and the resource conservation movement of the same time. This type of analysis coalesced in the 20th century, and took on a more holistic, national and even global form, culminating in the Brundtland Commission and the advocacy of sustainable development. Eco-tourism to some extent can be utilized as a tool for natural resource management. In this unit emphasis is on economics of natural resource management and concepts related to sustainable development.

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1.2 MANAGEMENT OF RENEWABLE RESOURCES

A natural resource is a renewable resource if it is replaced by natural processes at a rate comparable or faster than its rate of consumption by humans. Solar radiation, tides, winds and hydroelectricity are perpetual resources that are in no danger of a lack of long-term availability. Renewable resources may also mean commodities such as wood, paper, and leather, if harvesting is performed in a sustainable manner.

Some natural renewable resources such as geothermal power, fresh water, timber, and biomass must be carefully managed to avoid exceeding the world’s capacity to replenish them. A life cycle assessment provides a systematic means of evaluating renewability.The term has a connotation of sustainability of the natural environment. Gasoline, coal, natural gas, diesel, and other commodities derived from fossil fuels are non-renewable. Unlike fossil fuels, a renewable resource can have a sustainable yield.

In order to optimize renewable resources in the best possible way they are used to generate renewable energy. Renewable energy is energy generated from natural resources—such as sunlight, wind, rain, tides, and geothermal heat—which are renewable (naturally replenished). In 2006, about 18% of global final energy consumption came from renewables, with 13% coming from traditional biomass, such as wood-burning. Hydroelectricity was the next largest renewable source, providing 3% of global energy consumption and 15% of global electricity generation.

Wind power is growing at the rate of 30 percent annually, with a worldwide installed capacity of 121,000 megawatts (MW) in 2008, and is widely used in European countries and the United States. The annual manufacturing output of the photovoltaics industry reached 6,900 MW in 2008, and photovoltaic (PV) power stations are popular in Germany and Spain. Solar thermal power stations operate in the USA and Spain, and the largest of these is the 354 MW SEGS power plant in the Mojave Desert.

The world's largest geothermal power installation is The Geysers in California, with a rated capacity of 750 MW. Brazil has one of the largest renewable energy programs in the world, involving production of ethanol fuel from sugar cane, and ethanol now provides 18 percent of the country's automotive fuel. Ethanol fuel is also widely available in the USA.While most renewable energy projects and production is large-scale, renewable technologies are also suited to small off-grid applications, sometimes in rural and remote areas, where energy is often crucial in human development. Kenya has the world's highest household solar ownership rate with roughly 30,000 small (20–100 watt) solar power systems sold per year. Some renewable-energy technologies are criticized for being intermittent or unsightly, yet the renewable-energy market continues to grow. Climate-change concerns, coupled with high oil prices, peak oil, and increasing government support, are driving increasing renewable-energy legislation, incentives and

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commercialization. New government spending, regulation and policies should help the industry weather the 2009 economic crisis better than many other sectors.

Main forms/sources of renewable energy

The majority of renewable energy technologies are powered by the sun. The Earth-Atmosphere system is in equilibrium such that heat radiation into space is equal to incoming solar radiation, the resulting level of energy within the Earth-Atmosphere system can roughly be described as the Earth's "climate." The hydrosphere (water) absorbs a major fraction of the incoming radiation. Most radiation is absorbed at low latitudes around the equator, but this energy is dissipated around the globe in the form of winds and ocean currents. Wave motion may play a role in the process of transferring mechanical energy between the atmosphere and the ocean through wind stress. Solar energy is also responsible for the distribution of precipitation which is tapped by hydroelectric projects, and for the growth of plants used to create biofuels.

Renewable energy flows involve natural phenomena such as sunlight, wind, tides and geothermal heat, as the International Energy Agency explains: Renewable energy is derived from natural processes that are replenished constantly. In its various forms, it derives directly from the sun, or from heat generated deep within the earth. Included in the definition is electricity and heat generated from solar, wind, ocean, hydropower, biomass, geothermal resources, and biofuels and hydrogen derived from renewable resources. Each of these sources has unique characteristics which influence how and where they are used.

Wind power

Airflows can be used to run wind turbines. Modern wind turbines range from around 600 kW to 5 MW of rated power, although turbines with rated output of 1.5–3 MW have become the most common for commercial use; the power output of a turbine is a function of the cube of the wind speed, so as wind speed increases, power output increases dramatically. Areas where winds are stronger and more constant, such as offshore and high altitude sites are preferred locations for wind farms. Typical capacity factors are 20-40%, with values at the upper end of the range in particularly favourable sites.

Globally, the long-term technical potential of wind energy is believed to be five times total current global energy production, or 40 times current electricity demand. This could require large amounts of land to be used for wind turbines, particularly in areas of higher wind resources. Offshore resources experience mean wind speeds of ~90% greater than that of land, so offshore resources could contribute substantially more energy. This number could also increase with higher altitude ground-based or airborne wind turbines.

Wind power is renewable and produces no greenhouse gases during operation, such as carbon dioxide and methane.

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Water power

Energy in water (in the form of kinetic energy, temperature differences or salinity gradients) can be harnessed and used. Since water is about 800 times denser than air, even a slow flowing stream of water, or moderate sea swell, can yield considerable amounts of energy.

There are many forms of water energy:

Hydroelectric energy is a term usually reserved for large-scale hydroelectric dams. Examples are the Grand Coulee Dam in Washington State and the Akosombo Dam in Ghana.

Micro hydro systems are hydroelectric power installations that typically produce up to 100 kW of power. They are often used in water rich areas as a Remote Area Power Supply (RAPS). There are many of these installations around the world, including several delivering around 50 kW in the Solomon Islands.

Damless hydro systems derive kinetic energy from rivers and oceans without using a dam.

Ocean energy describes all the technologies to harness energy from the ocean and the sea:

o Marine current power. Similar to tidal stream power, uses the kinetic energy of marine currents

o Ocean thermal energy conversion (OTEC) uses the temperature difference between the warmer surface of the ocean and the colder lower recesses. To this end, it employs a cyclic heat engine. OTEC has not been field-tested on a large scale.

o Tidal power captures energy from the tides.o Wave power uses the energy in waves. Wave power machines usually take

the form of floating or neutrally buoyant structures which move relative to one another or to a fixed point.

Osmotic power or salinity gradient power is the energy retrieved from the difference in the salt concentration between seawater and river water. Reverse electrodialysis (PRO) is in the research and testing phase.

Vortex power is generated by placing obstacles in rivers in order to cause the formation of vortices which can then be tapped for energy.

Solar energy

In this context, "solar energy" refers to energy that is collected from sunlight. Solar energy can be applied in many ways, including to:

Generate electricity using photovoltaic solar cells. Generate electricity using concentrating solar power. Generate electricity by heating trapped air which rotates turbines in a Solar

updraft tower. Generate hydrogen using photoelectrochemical cells.

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Heat water or air for domestic hot water and space heating needs using solar-thermal panels.

Heat buildings, directly, through passive solar building design. Heat foodstuffs, through solar ovens. Solar air conditioning

Biofuel

Plants use photosynthesis to grow and produce biomass. Also known as biomatter, biomass can be used directly as fuel or to produce biofuels. Agriculturally produced biomass fuels, such as biodiesel, ethanol and bagasse (often a by-product of sugar cane cultivation) can be burned in internal combustion engines or boilers. Typically biofuel is burned to release its stored chemical energy. Research into more efficient methods of converting biofuels and other fuels into electricity utilizing fuel cells is an area of very active work.

Liquid biofuel

Liquid biofuel is usually either a bioalcohol such as ethanol fuel or oil such as biodiesel or straight vegetable oil. Biodiesel can be used in modern diesel vehicles with little or no modification to the engine. It can be made from waste and virgin vegetable and animal oils and fats (lipids). Virgin vegetable oils can be used in modified diesel engines. In fact the diesel engine was originally designed to run on vegetable oil rather than fossil fuel. A major benefit of biodiesel use is the reduction in net CO2 emissions, since all the carbon emitted was recently captured during the growing phase of the biomass. The use of biodiesel also reduces emission of carbon monoxide and other pollutants by 20 to 40%.

In some areas corn, cornstalks, sugarbeets, sugar cane, and switchgrasses are grown specifically to produce ethanol (also known as grain alcohol) a liquid which can be used in internal combustion engines and fuel cells. Ethanol is being phased into the current energy infrastructure. E85 is a fuel composed of 85% ethanol and 15% gasoline that is sold to consumers. Biobutanol is being developed as an alternative to bioethanol. Another source of biofuel is sweet sorghum. It produces both food and fuel from the same crop. Some studies have shown that the crop is net energy positive ie. it produces more energy than is consumed in its production and utilization.

Solid biomass

Solid biomass is most commonly used directly as a combustible fuel, producing 10-20 MJ/kg of heat. Its forms and sources include wood fuel, the biogenic portion of municipal solid waste, or the unused portion of field crops. Field crops may or may not be grown intentionally as an energy crop, and the remaining plant byproduct used as a fuel. Most types of biomass contain energy. Even cow manure still contains two-thirds of the original energy consumed by the cow. Energy harvesting via a bioreactor is a cost-effective solution to the waste disposal issues faced by the dairy farmer, and can produce enough biogas to run a farm.

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With current technology, it is not ideally suited for use as a transportation fuel. Most transportation vehicles require power sources with high power density, such as that provided by internal combustion engines. These engines generally require clean burning fuels, which are generally in liquid form, and to a lesser extent, compressed gaseous phase. Liquids are more portable because they can have a high energy density, and they can be pumped, which makes handling easier.

Non-transportation applications can usually tolerate the low power-density of external combustion engines that can run directly on less-expensive solid biomass fuel, for combined heat and power. One type of biomass is wood, which has been used for millennia. Two billion people currently cook every day, and heat their homes in the winter by burning biomass, which is a major contributor to man-made climate change global warming. The black soot that is being carried from Asia to polar ice caps is causing them to melt faster in the summer. In the 19th century, wood-fired steam engines were common, contributing significantly to industrial revolution unhealthy air pollution. Coal is a form of biomass that has been compressed over millennia to produce a non-renewable, highly-polluting fossil fuel.

Wood and its byproducts can now be converted through processes such as gasification into biofuels such as woodgas, biogas, methanol or ethanol fuel; although further development may be required to make these methods affordable and practical. Sugar cane residue, wheat chaff, corn cobs and other plant matter can be, and are, burned quite successfully. The net carbon dioxide emissions that are added to the atmosphere by this process are only from the fossil fuel that was consumed to plant, fertilize, harvest and transport the biomass.

Processes to harvest biomass from short-rotation trees like poplars and willows and perennial grasses such as switchgrass, phalaris, and miscanthus, require less frequent cultivation and less nitrogen than do typical annual crops. Pelletizing miscanthus and burning it to generate electricity is being studied and may be economically viable.

Biogas

Biogas can easily be produced from current waste streams, such as paper production, sugar production, sewage, animal waste and so forth. These various waste streams have to be slurried together and allowed to naturally ferment, producing methane gas. This can be done by converting current sewage plants into biogas plants. When a biogas plant has extracted all the methane it can, the remains are sometimes more suitable as fertilizer than the original biomass. Alternatively biogas can be produced via advanced waste processing systems such as mechanical biological treatment. These systems recover the recyclable elements of household waste and process the biodegradable fraction in anaerobic digesters.

Renewable natural gas is a biogas which has been upgraded to a quality similar to natural gas. By upgrading the quality to that of natural gas, it becomes possible to distribute the gas to the mass market via the existing gas grid.

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Geothermal energy

Geothermal energy is energy obtained by tapping the heat of the earth itself, both from kilometers deep into the Earth's crust in some places of the globe or from some meters in geothermal heat pump in all the places of the planet. It is expensive to build a power station but operating costs are low resulting in low energy costs for suitable sites. Ultimately, this energy derives from heat in the Earth's core.

Three types of power plants are used to generate power from geothermal energy: dry steam, flash, and binary. Dry steam plants take steam out of fractures in the ground and use it to directly drive a turbine that spins a generator. Flash plants take hot water, usually at temperatures over 200 °C, out of the ground, and allows it to boil as it rises to the surface then separates the steam phase in steam/water separators and then runs the steam through a turbine. In binary plants, the hot water flows through heat exchangers, boiling an organic fluid that spins the turbine. The condensed steam and remaining geothermal fluid from all three types of plants are injected back into the hot rock to pick up more heat.

The geothermal energy from the core of the Earth is closer to the surface in some areas than in others. Where hot underground steam or water can be tapped and brought to the surface it may be used to generate electricity. Such geothermal power sources exist in certain geologically unstable parts of the world such as Chile, Iceland, New Zealand, United States, the Philippines and Italy. The two most prominent areas for this in the United States are in the Yellowstone basin and in northern California. Iceland produced 170 MW geothermal powers and heated 86% of all houses in the year 2000 through geothermal energy. Some 8000 MW of capacity is operational in total.

There is also the potential to generate geothermal energy from hot dry rocks. Holes at least 3 km deep are drilled into the earth. Some of these holes pump water into the earth, while other holes pump hot water out. The heat resource consists of hot underground radiogenic granite rocks, which heat up when there is enough sediment between the rock and the earth’s surface. Several companies in Australia are exploring this technology.

1.3 RENEWABLE ENERGY COMMERCIALIZATION

When comparing renewable energy sources with each other and with conventional power sources, three main factors must be considered:

capital costs (including, for nuclear energy, waste-disposal and decommissioning costs);

operating and maintenance costs; Fuel costs (for fossil-fuel and biomass sources—for wastes, these costs may

actually be negative).

These costs are all brought together, using discounted cash flow, here. Inherently, renewables are on a decreasing cost curve, while non-renewables are on an increasing

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cost curve. In 2009, costs are comparable among wind, nuclear, coal, and natural gas, but for CSP—concentrating solar power—and PV (photovoltaics) they are somewhat higher. There are additional costs for renewables in terms of increased grid interconnection to allow for variability of weather and load, but these have been shown in the pan-European case to be quite low—overall, wind energy costs about the same as present-day power.

Wind power is growing at the rate of 30 percent annually, with a worldwide installed capacity of over 100 GW, and is widely used in several European countries and the United States. The manufacturing output of the photovoltaics industry reached more than 2,000 MW in 2006, and photovoltaic (PV) power stations are particularly popular in Germany and Spain. Solar thermal power stations operate in the USA and Spain, and the largest of these is the 354 MW SEGS power plant in the Mojave Desert.

The world's largest geothermal power installation is The Geysers in California, with a rated capacity of 750 MW. Brazil has one of the largest renewable energy programs in the world, involving production of ethanol fuel from sugar cane, and ethanol now provides 18 percent of the country's automotive fuel. Ethanol fuel is also widely available in the USA.

Growth of renewables

From the end of 2004 to the end of 2008, solar photovoltaic (PV) capacity increased six fold to more than 16 gig watts (GW), wind power capacity increased 250 percent to 121 GW, and total power capacity from new renewable increased 75 percent to 280 GW. During the same period, solar heating capacity doubled to 145 gig watts-thermal (GWth), while bio diesel production increased six fold to 12 billion liters per year and ethanol production doubled to 67 billion liters per year.

Selected renewable energy indicators

Selected global indicators   2006   2007   2008  Investment in new renewable capacity (annual) 63 104 120 billion USD

Existing renewables power capacity,including large-scale hydro 1,020 1,070 1,140 GWe

Existing renewables power capacity,excluding large hydro 207 240 280 GWe

Wind power capacity (existing) 74 94 121 GWeBiomass heating ~250 GWth

Solar hot water/ Space heating 145 GWthGeothermal heating ~50 GWth

Ethanol production (annual) 39 50 67 billion litersCountries with policy targets

for renewable energy use 66 73

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Wind power market

At the end of 2008, worldwide wind farm capacity was 120,791 megawatts (MW), representing an increase of 28.8 percent during the year, and wind power produced some 1.3% of global electricity consumption. Wind power accounts for approximately 19% of electricity use in Denmark, 9% in Spain and Portugal, and 6% in Germany and the Republic of Ireland. The United States is an important growth area and installed U.S. wind power capacity reached 25,170 MW at the end of 2008. As of September 2009, the Roscoe Wind Farm (781 MW) is the world's largest wind farm.

In the UK, a licence to build the world's largest offshore windfarm, in the Thames estuary, has been granted. The London Array windfarm, 20 km off Kent and Essex, should eventually consist of 341 turbines, occupying an area of 230 km². This is a £1.5 billion, 1,000 megawatt project, which will power one-third of London homes. The windfarm will produce an amount of energy that, if generated by conventional means, would result in 1.9 million tonnes of carbon dioxide emissions every year. It could also make up to 10% of the Government's 2010 renewables target.

New generation of solar thermal plants

Large solar thermal power stations include the 354 megawatt (MW) Solar Energy Generating Systems power plant in the USA, Nevada Solar One (USA, 64 MW), Andasol 1 (Spain, 50 MW), PS20 solar power tower (Spain, 20 MW), and the PS10 solar power tower (Spain, 11 MW).

The solar thermal power industry is growing rapidly with 1.2 GW under construction as of April 2009 and another 13.9 GW announced globally through 2014. Spain is the epicenter of solar thermal power development with 22 projects for 1,037 MW under construction, all of which are projected to come online by the end of 2010. In the United States, 5,600 MW of solar thermal power projects have been announced. In developing countries, three World Bank projects for integrated solar thermal/combined-cycle gas-turbine power plants in Egypt, Mexico, and Morocco have been approved.

World's largest photovoltaic power plants

As of January 2009, the largest photovoltaic (PV) power plants in the world are the Parque Fotovoltaico Olmedilla de Alarcon (Spain, 60 MW), the Moura photovoltaic power station (Portugal, 46 MW), and the Waldpolenz Solar Park (Germany, 40 MW). Several other PV power plants were completed in Spain in 2008: Planta Solar Arnedo (30 MW), Parque Solar Merida/Don Alvaro (30 MW), Planta solar Fuente Álamo (26 MW), Planta fotovoltaica de Lucainena de las Torres (23.2 MW), Parque Fotovoltaico Abertura Solar (23.1 MW), Parque Solar Hoya de Los Vincentes (23 MW), Huerta Solar Almaraz (22.1 MW), Solarpark Calveron (21 MW), and the Planta Solar La Magascona (20 MW). Topaz Solar Farm is a proposed 550 MW solar photovoltaic power plant which is to be built northwest of California Valley in the USA at a cost of over $1 billion. Built on

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9.5 square miles (25 km2) of ranchland, the project would utilize thin-film PV panels designed and manufactured by OptiSolar in Hayward and Sacramento. The project would deliver approximately 1,100 gigawatt-hours (GW·h) annually of renewable energy. The project is expected to begin construction in 2010, begin power delivery in 2011, and be fully operational by 2013.

High Plains Ranch is a proposed 250 MW solar photovoltaic power plant which is to be built by SunPower in the Carrizo Plain, northwest of California Valley.However, when it comes to renewable energy systems and PV, it is not just large systems that matter. Building-integrated photovoltaics or "onsite" PV systems have the advantage of being matched to end use energy needs in terms of scale. So the energy is supplied close to where it is needed.

Use of ethanol for transportation

Since the 1970s, Brazil has had an ethanol fuel program which has allowed the country to become the world's second largest producer of ethanol (after the United States) and the world's largest exporter. Brazil’s ethanol fuel program uses modern equipment and cheap sugar cane as feedstock, and the residual cane-waste (bagasse) is used to process heat and power. There are no longer light vehicles in Brazil running on pure gasoline. By the end of 2008 there were 35,000 filling stations throughout Brazil with at least one ethanol pump.

Most cars on the road today in the U.S. can run on blends of up to 10% ethanol, and motor vehicle manufacturers already produce vehicles designed to run on much higher ethanol blends. Ford, DaimlerChrysler, and GM are among the automobile companies that sell “flexible-fuel” cars, trucks, and minivans that can use gasoline and ethanol blends ranging from pure gasoline up to 85% ethanol (E85). By mid-2006, there were approximately six million E85-compatible vehicles on U.S. roads. The challenge is to expand the market for biofuels beyond the farm states where they have been most popular to date. Flex-fuel vehicles are assisting in this transition because they allow drivers to choose different fuels based on price and availability. The Energy Policy Act of 2005, which calls for 7.5 billion gallons of biofuels to be used annually by 2012, will also help to expand the market.

Geothermal energy prospects

The Geysers, is a geothermal power field located 72 miles (116 km) north of San Francisco, California. It is the largest geothermal development in the world outputting over 750 MW. By the end of 2005 worldwide use of geothermal energy for electricity had reached 9.3 GWs, with an additional 28 GW used directly for heating. If heat recovered by ground source heat pumps is included, the non-electric use of geothermal energy is estimated at more than 100 GWt (gigawatts of thermal power) and is used commercially in over 70 countries.( sec 1.2) During 2005 contracts were placed for an additional

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0.5 GW of capacity in the United States, while there were also plants under construction in 11 other countries.

Wave farms expansion

Portugal now has the world's first commercial wave farm, the Agucadoura Wave Park, officially opened in September 2008. The farm uses three Pelamis P-750 machines generating 2.25 MW. Initial costs are put at €8.5 million. A second phase of the project is now planned to increase the installed capacity to 21MW using a further 25 Pelamis machines.Funding for a wave farm in Scotland was announced in February, 2007 by the Scottish Government, at a cost of over 4 million pounds, as part of a £13 million funding packages for ocean power in Scotland. The farm will be the world's largest with a capacity of 3MW generated by four Pelamis machines.

Developing country markets

Renewable energy can be particularly suitable for developing countries. In rural and remote areas, transmission and distribution of energy generated from fossil fuels can be difficult and expensive. Producing renewable energy locally can offer a viable alternative.Renewable energy projects in many developing countries have demonstrated that renewable energy can directly contribute to poverty alleviation by providing the energy needed for creating businesses and employment. Renewable energy technologies can also make indirect contributions to alleviating poverty by providing energy for cooking, space heating, and lighting. Renewable energy can also contribute to education, by providing electricity to schools. Kenya is the world leader in the number of solar power systems installed per capita (but not the number of watts added). More than 30,000 very small solar panels, each producing 12 to 30 watts, are sold in Kenya annually. For an investment of as little as $100 for the panel and wiring, the PV system can be used to charge a car battery, which can then provide power to run a fluorescent lamp or a small television for a few hours a day. More Kenyans adopt solar power every year than make connections to the country’s electric grid.

Potential future utilization

Sustainable development and global warming groups propose a 100% Renewable Energy Source Supply, without fossil fuels and nuclear power. Scientists from the University of Kassel have suggested that Germany can power itself entirely by renewable energy.

Industry and policy trends

Many countries and states have implemented incentives — like government tax subsidies, partial co-payment schemes and various rebates over purchase of renewables — to

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encourage consumers to shift to renewable energy sources. Government grants fund for research in renewable technology to make the production cheaper and generation more efficient. While government incentives drive much of the renewable energy industry, according to the Environmental Law Institute, fossil fuel energy receives much more in subsidies than renewables in the US. The ELI states that fossil fuel industries received $72 billion in subsides and incentives compared to $29 billion for renewables. Development of loan programs that stimulate renewable favoring market forces with attractive return rates, buffer initial deployment costs and entice consumers to consider and purchase renewable technology. A famous example is the solar loan program sponsored by UNEP helping 100,000 people finance solar power systems in India. Success in India's solar program has led to similar projects in other parts of developing world like Tunisia, Morocco, Indonesia and Mexico.Imposition of fossil fuel consumption and carbon taxes, and channel the revenue earned towards renewable energy development.

Also oil peak and world petroleum crisis and inflation are helping to promote renewables.Many think-tanks are warning that the world needs an urgency driven concerted effort to create a competitive renewable energy infrastructure and market. The developed world can make more research investments to find better cost efficient technologies, and manufacturing could be transferred to developing countries in order to use low labor costs. The renewable energy market could increase fast enough to replace and initiate the decline of fossil fuel dominance and the world could then avert the looming climate and peak oil crises.

Most importantly, renewables is gaining credence among private investors as having the potential to grow into the next big industry. Many companies and venture capitalists are investing in photovoltaic development and manufacturing. This trend is particularly visible in Silicon valley, California, Europe, Japan. Central to the discussion over what power sources are renewable are definitions in law, which may determine whether certain projects are eligible for subsidies (or tax benefits). As a result, environmental groups and vested interests have done considerable lobbying and affected the definition of renewable or sustainable sources in legislation.

Constraints and opportunities

Availability and reliability

There is no shortage of solar-derived energy on Earth. Indeed the storages and flows of energy on the planet are very large relative to human needs.

Annual photosynthesis by the vegetation in the United States is 50 billion GJ, equivalent to nearly 60% of the nation’s annual fossil fuel use.

The amount of solar energy intercepted by the Earth every minute is greater than the amount of energy the world uses in fossil fuels each year.

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The energy in the winds that blow across the United States each year could produce more than 16 billion GJ of electricity—more than one and one-half times the electricity consumed in the United States in 2000.

Tropical oceans absorb 560 trillion gigajoules (GJ) of solar energy each year, equivalent to 1,600 times the world’s annual energy use.

A criticism of some renewable sources is their variable nature. But renewable power sources can actually be integrated into the grid system quite well, as Amory Lovins explains:

Variable but forecastable renewables (wind and solar cells) are very reliable when integrated with each other, existing supplies and demand. For example, three German states were more than 30 percent wind-powered in 2007—and more than 100 percent in some months. Mostly renewable power generally needs less backup than utilities already bought to combat big coal and nuclear plants' intermittence.

The challenge of variable power supply may be readily alleviated by grid energy storage. Available storage options include pumped-storage hydro systems, batteries, hydrogen fuel cells, thermal mass and compressed air. Initial investments in such energy storage systems may be high, although the costs can be recovered over the life of the system.Lovins goes on to say that the unreliability of renewable energy is a myth, while the unreliability of nuclear energy is real. Of all U.S. nuclear plants built, 21 percent were abandoned and 27 percent have failed at least once. Successful reactors must close for refueling every 17 months for 39 days. And when shut in response to grid failure, they can't quickly restart. This is simply not the case for wind farms, for example. Wave energy and some other renewables are continuously available. A wave energy scheme installed in Australia generates electricity with an 80% availability factor.

Environmental, social and legal considerations

While most renewable energy sources do not produce pollution directly, the materials, industrial processes, and construction equipment used to create them may generate waste and pollution. Some renewable energy systems actually create environmental problems.

Land area required

Another environmental issue, particularly with biomass and biofuels, is the large amount of land required to harvest energy, which otherwise could be used for other purposes or left as undeveloped land. However, it should be pointed out that these fuels may reduce the need for harvesting non-renewable energy sources, such as vast strip-mined areas and Slag Mountains for coal, safety zones around nuclear plants, and hundreds of square miles being strip-mined for oil sands. These responses, however, do not account for the extremely high biodiversity and endemism of land used for ethanol crops, particularly sugar cane.

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In the U.S., crops grown for biofuels are the most land- and water-intensive of the renewable energy sources. In 2005, about 12% of the nation’s corn crop (covering 11 million acres (45,000 km²) of farmland) was used to produce four billion gallons of ethanol—which equates to about 2% of annual U.S. gasoline consumption. For biofuels to make a much larger contribution to the energy economy, the industry will have to accelerate the development of new feedstocks, agricultural practices, and technologies that are more land and water efficient.

The efficiency of biofuels production has increased significantly and there are new methods to boost biofuel production, although using bioelectricity, by burning the biomass to produce electricity for an electric car, increases the distance that a car can go from a hectare (about 2.5 acres) of crops by 81%, from 30,000 km to 54,000 km per year. However, covering that same hectare with photovoltaics (in relatively sunless Germany or England) allows the electric car to go 3,250,000 km/year, over 100 times as far as from biofuel.

Hydroelectricity

The major advantage of hydroelectric systems is the elimination of the cost of fuel. Other advantages include longer life than fuel-fired generation, low operating costs, and the provision of facilities for water sports. Operation of pumped-storage plants improves the daily load factor of the generation system. Overall, hydroelectric power can be far less expensive than electricity generated from fossil fuels or nuclear energy, and areas with abundant hydroelectric power attract industry.

However, there are several major disadvantages of hydroelectric systems. These include: dislocation of people living where the reservoirs are planned, release of significant amounts of carbon dioxide at construction and flooding of the reservoir, disruption of aquatic ecosystems and birdlife, adverse impacts on the river environment, potential risks of sabotage and terrorism, and in rare cases catastrophic failure of the dam wall.

Large hydroelectric power is considered to be a renewable energy by a large number of sources, however, many groups have lobbied for it to be excluded from renewable electricity standards, any initiative to promote the use of renewable energies, and sometimes the definition of renewable itself. Some organizations, including US federal agencies, will specifically refer to "non-hydro renewable energy". Many laws exist that specifically label "small hydro" as renewable or sustainable and large hydro as not. Furthermore, the line between what is small or large also differs by governing body.

Hydroelectric power is now more difficult to site in developed nations because most major sites within these nations are either already being exploited or may be unavailable for other reasons such as environmental considerations.

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Wind farms

A wind farm, when installed on agricultural land, has one of the lowest environmental impacts of all energy sources: To generate the total electricity used in the UK annually, 6% of the land area would be utilised, an area of about 70 miles by 70 miles, and this would not preclude that land from being used for other purposes.

Wind power occupies less land area per kilowatt-hour (kWh) of electricity generated than any other energy conversion system, apart from rooftop solar energy, and is compatible with grazing and crops.

It generates the energy used in its construction in just 3 months of operation, yet its operational lifetime is 20–25 years.

Greenhouse gas emissions and air pollution produced by its construction are low and declining. There are no emissions or pollution produced by its operation.

In substituting for base-load coal power, wind power produces a net decrease in greenhouse gas emissions and air pollution, and a net increase in biodiversity.

Modern wind turbines are almost silent and rotate so slowly (in terms of revolutions per minute) that they are rarely a hazard to birds.

Studies of birds and offshore wind farms in Europe have found that there are very few bird collisions. Several offshore wind sites in Europe have been in areas heavily used by seabirds. Improvements in wind turbine design, including a much slower rate of rotation of the blades and a smooth tower base instead of perchable lattice towers, have helped reduce bird mortality at wind farms around the world. However older smaller wind turbines may be hazardous to flying birds. Birds are severely impacted by fossil fuel energy; examples include birds dying from exposure to oil spills, habitat loss from acid rain and mountaintop removal coal mining, and mercury poisoning.

Longevity issues

Though a source of renewable energy may last for billions of years, renewable energy infrastructure, like hydroelectric dams, will not last forever, and must be removed and replaced at some point. Events like the shifting of riverbeds, or changing weather patterns could potentially alter or even halt the function of hydroelectric dams, lowering the amount of time they are available to generate electricity.

Some have claimed that geothermal being a renewable energy source depends on the rate of extraction being slow enough such that depletion does not occur. If depletion does occur, the temperature can regenerate if given a long period of non-use.

The government of Iceland states: "It should be stressed that the geothermal resource is not strictly renewable in the same sense as the hydro resource." It estimates that Iceland's geothermal energy could provide 1700 MW for over 100 years, compared to the current production of 140 MW. Radioactive elements in the Earth's crust continuously decay, replenishing the heat. The International Energy Agency classifies geothermal power as renewable.

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Biofuels production

All biomass needs to go through some of these steps: it needs to be grown, collected, dried, fermented and burned. All of these steps require resources and an infrastructure.

Some studies contend that ethanol is "energy negative", meaning that it takes more energy to produce than is contained in the final product. However, a large number of recent studies, including a 2006 article in the journal Science offer the opinion that fuels like ethanol are energy positive. Furthermore, fossil fuels also require significant energy inputs which have seldom been accounted for in the past.

Additionally, ethanol is not the only product created during production, and the energy content of the by-products must also be considered. Corn is typically 66% starch and the remaining 33% is not fermented. This unfermented component is called distillers grain, which is high in fats and proteins, and makes good animal feed. In Brazil, where sugar cane is used, the yield is higher, and conversion to ethanol is somewhat more energy efficient than corn. Recent developments with cellulosic ethanol production may improve yields even further.

According to the International Energy Agency, new biofuels technologies being developed today, notably cellulosic ethanol, could allow biofuels to play a much bigger role in the future than previously thought. Cellulosic ethanol can be made from plant matter composed primarily of inedible cellulose fibers that form the stems and branches of most plants. Crop residues (such as corn stalks, wheat straw and rice straw), wood waste, and municipal solid waste are potential sources of cellulosic biomass. Dedicated energy crops, such as switchgrass, are also promising cellulose sources that can be sustainably produced in many regions of the United States.

The ethanol and biodiesel production industries also create jobs in plant construction, operations, and maintenance, mostly in rural communities. According to the Renewable Fuels Association, the ethanol industry created almost 154,000 U.S. jobs in 2005 alone, boosting household income by $5.7 billion. It also contributed about $3.5 billion in tax revenues at the local, state, and federal levels.

Diversification

The U.S. electric power industry now relies on large, central power stations, including coal, natural gas, nuclear, and hydropower plants that together generate more than 95% of the nation’s electricity. Over the next few decades uses of renewable energy could help to diversify the nation’s bulk power supply. Already, appropriate renewable resources (which exclude large hydropower) produce 12% of northern California’s electricity.

Although most of today’s electricity comes from large, central-station power plants, new technologies offer a range of options for generating electricity nearer to where it is needed, saving on the cost of transmitting and distributing power and improving the overall efficiency and reliability of the system.

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Improving energy efficiency represents the most immediate and often the most cost-effective way to reduce oil dependence, improve energy security, and reduce the health and environmental impact of the energy system. By reducing the total energy requirements of the economy, improved energy efficiency could make increased reliance on renewable energy sources more practical and affordable.

Competition with nuclear power

Nuclear power continues to be considered as an alternative to fossil-fuel power sources (see Low carbon power generation), and in 1956, when the first peak oil paper was presented, nuclear was presented as the replacement for fossil fuel. However, that prospect effectively ended in the United States with Three Mile Island, and in the rest of the world with Chernobyl. Only France developed any significant use of nuclear power, reaching almost 80% uses in 2004.

Physicist Bernard Cohen proposed in 1983 that uranium is effectively inexhaustible, and could therefore be considered a renewable source of energy. However, this claim has not been proven, and issues such as peak uranium and uranium depletion are ongoing debates. No legislative body has yet included nuclear energy under any legal definition of "renewable energy sources" for provision of development support, and statutory and scientific definitions of renewable energies normally exclude nuclear energy.

1.4 NON-RENEWABLE OR EXHAUSTIBLE RESOURCES

A non-renewable resource is a natural resource that cannot be produced, re-grown, regenerated, or reused on a scale which can sustain its consumption rate. These resources often exist in a fixed amount, or are consumed much faster than nature can recreate them. Fossil fuel (such as coal, petroleum and natural gas) and nuclear power are examples. In contrast, resources such as timber (when harvested sustainably) or metals (which can be recycled) are considered renewable resources.

Fossil fuels

Natural resources such as coal, petroleum, oil and natural gas take thousands of years to form naturally and cannot be replaced as fast as they are being consumed. Eventually natural resources will become too costly to harvest and humanity will need to find other sources of energy. At present, the main energy sources used by humans are non-renewable as they are cheap to produce.

Some natural resources, called renewable resources, are replaced by natural processes given a reasonable amount of time. Soil, water, forests, plants, and animals are all renewable resources as long as they are properly conserved. Solar, wind, wave, and geothermal energies are based on renewable resources. Renewable resources such as the movement of water (hydropower, including tidal power; ocean surface waves used for wave power), wind (used for wind power), geothermal heat (used for geothermal power); and radiant energy (used for solar power) are practically infinite and cannot be depleted,

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unlike their non-renewable counterparts, which are likely to run out if not used wisely. Still, these technologies are not fully utilized.

Economic models

Hotelling's rule is a 1931 economic model of non-renewable resource management by Harold Hotelling. It shows that efficient exploitation of a nonrenewable and non augmentable resource would, under otherwise stable economic conditions, lead to a depletion of the resource. The rule states that this would lead to a net price or "Hotelling rent" for it that rose annually at a rate equal to the rate of interest, reflecting the increasing scarcity of the resources. The Hartwick's rule provides an important result about the sustainability of welfare in an economy that uses non-renewable resources.

1.4.1 Nonrenewable resources system

The nonrenewable resource system starts with the assumption that the total amount of resources available is finite (about 110 times the consumption at 1990s rates for the world3/91 model). These resources can be extracted and then used for various purposes in other systems in the model. An important assumption that was made is that as the nonrenewable resources are extracted, the remaining resources are increasingly difficult to extract, thus diverting more and more industrial output to resource extraction.

1.4.2 Low-carbon economy

A Low-Carbon Economy (LCE) or Low-Fossil-Fuel Economy (LFFE) is a concept that refers to an economy which has a minimal output of greenhouse gas (GHG) emissions into the biosphere, but specifically refers to the greenhouse gas carbon dioxide. Recently, most of scientific and public opinion has come to the conclusion there is such an accumulation of GHGs (especially CO2) in the atmosphere due to anthropogenic causes, that the climate is changing. The over-concentrations of these gases are producing global warming that affects long-term climate, with negative impacts on humanity in the foreseeable future. Globally implemented LCE's therefore, are proposed as a means to avoid catastrophic climate change, and as a precursor to the more advanced, zero-carbon society and renewable-energy economy.

Some nations are low carbon - societies which are not heavily industrialised or populated. In order to avoid climate change at any point in the future, all nations considered carbon intensive societies and societies which are heavily populated, should become zero-carbon societies and economies. Several of these countries have pledged to become 'low carbon' but not entirely zero carbon, and claim that emissions will be cut by 100% by offsetting emissions rather than ceasing all emissions - carbon neutrality. In other words, some emitting will continue which will be offset (so,the are not low-emission) .

Nations seek to become low-carbon economies as a part of a national global warming mitigation strategy. A comprehensive strategy to manage global warming is carbon neutrality, geo engineering and adaptation to global warming.

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Nuclear power, or, the proposed strategies of carbon capture and storage (CCS) have been proposed as the primary means to achieve a LCE while continuing to exploit non-renewable resources; there is concern, however, with the matter of spent-nuclear-fuel storage, security and the uncertainty of costs and time needed to successfully implement CCS worldwide and with guarantees that the stored emissions will not leak into the biosphere. Alternatively, many have proposed renewable energy should be the main basis of a LCE, but, they have their associated problems of high-cost and inefficiency; this is changing, however, since investment and production have been growing significantly in recent times. Furthermore, regardless of the effect to the biosphere by GHG emissions, the growing issue of peak oil may also be reason enough for a transition to an LCE.

The aim of a LCE is to integrate all aspects of itself from its manufacturing, agriculture, transportation and power-generation etc. around technologies that produce energy and materials with little GHG emission; and thus, around populations, buildings, machines and devices which use those energies and materials efficiently, and, dispose of or recycle its wastes so as to have a minimal output of GHGs. Furthermore, it has been proposed that to make the transition to an LCE economically viable we would have to attribute a cost(per unit output) to GHGs through means such as emissions trading and/or a carbon tax.

1.4.3 Hubbert peak theory

The Hubbert peak theory posits that for any given geographical area, from an individual oil-producing region to the planet as a whole, the rate of petroleum production tends to follow a bell-shaped curve. It is one of the primary theories on peak oil.

Choosing a particular curve determines a point of maximum production based on discovery rates, production rates and cumulative production. Early in the curve (pre-peak), the production rate increases because of the discovery rate and the addition of infrastructure. Late in the curve (post-peak), production declines because of resource depletion.

The Hubbert peak theory is based on the observation that the amount of oil under the ground in any region is finite; therefore the rate of discovery which initially increases quickly must reach a maximum and decline. In the US, oil extraction followed the discovery curve after a time lag of 32 to 35 years. The theory is named after American geophysicist M. King Hubbert, who created a method of modeling the production curve given an assumed ultimate recovery volume.

"Hubbert's peak" can refer to the peaking of production of a particular area, which has now been observed for many fields and regions.

Hubbert's Peak was achieved in the continental US in the early 1970s. Oil production peaked at 10.2 million barrels a day. Since then, it has been in a gradual decline.

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Peak oil as a proper noun or "Hubbert's peak" applied more generally, refers to a singular event in history: the peak of the entire planet's oil production. After Peak Oil, according to the Hubbert Peak Theory, the rate of oil production on Earth would enter a terminal decline. On the basis of his theory, in a paper he presented to the American Petroleum Institute in 1956, Hubbert correctly predicted that production of oil from conventional sources would peak in the continental United States around 1965-1970. Hubbert further predicted a worldwide peak at "about half a century" from publication and approximately 12 gig barrels (GB) a year in magnitude. In a 1976 TV interview Hubbert added that the actions of OPEC might flatten the global production curve but this would only delay the peak for perhaps 10 years.

Activity 1

1. What do you understand by renewable resources? discuss various uses of renewable resources.

2. Explain the types of exhaustible resources. What steps do governments of different nations take to optimally use these resources?

3. What are main forms of renewable energy?4. Write short notes on the following.

Biofuels production Hubbert peak theory Low carbon economy

1.5 SUMMARY

Natural resources are undoubtedly the backbone of our civilization. In a broad sense, they refer to all the living and nonliving endowment of the earth. Some natural resource stocks are renewable by natural or artificial processes while others are non-renewable – an often-used dichotomy in classifying resources. After introducing the basic concepts behind natural resources the unit discussed how these resources are managed in order to provide optimum benefits. In later sections commercialization of renewable energy was explained. Finally concepts and theories related to exhaustible resources have been discussed in detail.

1.6 FURTHER READINGS

Sawin, Janet. "Charting a New Energy Future." State of the World 2003. By Lester R. Brown. Boston: W. W. Norton & Company, Incorporated, 2003.

Krzeminska, Joanna, Are Support Schemes for Renewable Energies Compatible with Competition Objectives? An Assessment of National and Community Rules, Yearbook of European Environmental Law (Oxford University Press), Volume VII, Nov. 2007

Hotelling, H. 1931. The economics of exhaustible resources: Journ. Political Economy, Vol. 39, No. 2

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UNIT 2

SUSTAINABLE DEVELOPMENT AND ENVIRONMENT

Objectives

After studying this unit you should be able to:

Understand the approach and scope of sustainable development. Know the relevance of sustainable development in economics

Appreciate the initiatives of Indian government and corporate sector to maintain development through the sustainable development approach.

Be aware about the trade off between environment and development.

Structure

2.1 Introduction2.2 Scope and definitions of sustainable development2.3 Sustainable development in economics2.4 Sustainable development in India2.5 Environment vs. development2.6 Summary2.7 Further readings

2.1 INTRODUCTION

Sustainable development is a pattern of resource use that aims to meet human needs while preserving the environment so that these needs can be met not only in the present, but also for future generations. The term was used by the Brundtland Commission which coined what has become the most often-quoted definition of sustainable development as development that "meets the needs of the present without compromising the ability of future generations to meet their own needs."

Sustainable development ties together concern for the carrying capacity of natural systems with the social challenges facing humanity. As early as the 1970s "sustainability" was employed to describe an economy "in equilibrium with basic ecological support systems." Ecologists have pointed to the “limits of growth” and presented the alternative of a “steady state economy” in order to address environmental concerns.The field of sustainable development can be conceptually broken into three constituent parts: environmental sustainability, economic sustainability and sociopolitical sustainability.

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Figure 1 Scheme of sustainable development: at the confluence of three constituent parts

2.2 SCOPE AND DEFINITIONS OF SUSTAINABLE DEVELOPMENT

The concept has included notions of weak sustainability, strong sustainability and deep ecology. Sustainable development does not focus solely on environmental issues.In 1987, the United Nations released the Brundtland Report, which defines sustainable development as 'development which meets the needs of the present without compromising the ability of future generations to meet their own needs.'The United Nations 2005 World Summit Outcome Document refers to the "interdependent and mutually reinforcing pillars" of sustainable development as economic development, social development, and environmental protection.

Indigenous people have argued, through various international forums such as the United Nations Permanent Forum on Indigenous Issues and the Convention on Biological Diversity, that there are four pillars of sustainable development, the fourth being cultural. The Universal Declaration on Cultural Diversity (UNESCO, 2001) further elaborates the concept by stating that "...cultural diversity is as necessary for humankind as biodiversity is for nature”; it becomes “one of the roots of development understood not simply in terms of economic growth, but also as a means to achieve a more satisfactory intellectual, emotional, moral and spiritual existence". In this vision, cultural diversity is the fourth policy area of sustainable development.

Economic Sustainability: Agenda 21 clearly identified information, integration, and participation as key building blocks to help countries achieve development that recognizes these interdependent pillars. It emphasises that in sustainable development everyone is a user and provider of information. It stresses the need to change from old sector-centered ways of doing business to new approaches that involve cross-sectoral co-ordination and the integration of environmental and social concerns into all development

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processes. Furthermore, Agenda 21 emphasises that broad public participation in decision making is a fundamental prerequisite for achieving sustainable development.

According to Hasna, sustainability is a process which tells of a development of all aspects of human life affecting sustenance. It means resolving the conflict between the various competing goals, and involves the simultaneous pursuit of economic prosperity, environmental quality and social equity famously known as three dimensions (triple bottom line) with is the resultant vector being technology, hence it is a continually evolving process; the ‘journey’ (the process of achieving sustainability) is of course vitally important, but only as a means of getting to the destination (the desired future state). However, the ‘destination’ of sustainability is not a fixed place in the normal sense that we understand destination. Instead, it is a set of wishful characteristics of a future system.

Green development is generally differentiated from sustainable development in that Green development prioritizes what its proponents consider to be environmental sustainability over economic and cultural considerations. Proponents of Sustainable Development argue that it provides a context in which to improve overall sustainability where cutting edge Green development is unattainable. For example, a cutting edge treatment plant with extremely high maintenance costs may not be sustainable in regions of the world with fewer financial resources. An environmentally ideal plant that is shut down due to bankruptcy is obviously less sustainable than one that is maintainable by the community, even if it is somewhat less effective from an environmental standpoint.

Some research activities start from this definition to argue that the environment is a combination of nature and culture. The Network of Excellence "Sustainable Development in a Diverse World", sponsored by the European Union, integrates multidisciplinary capacities and interprets cultural diversity as a key element of a new strategy for sustainable development.

Still other researchers view environmental and social challenges as opportunities for development action. This is particularly true in the concept of sustainable enterprise that frames these global needs as opportunities for private enterprise to provide innovative and entrepreneurial solutions. This view is now being taught at many business schools including the Center for Sustainable Global Enterprise at Cornell University and the Erb Institute for Global Sustainable Enterprise at the University of Michigan.The United Nations Division for Sustainable Development lists the following areas as coming within the scope of sustainable development:

Sustainable development is an eclectic concept, as a wide array of views fall under its umbrella. The concept has included notions of weak sustainability, strong sustainability and deep ecology. Different conceptions also reveal a strong tension between egocentrism and anthropocentrism. The concept remains weakly defined and contains a large amount of debate as to its precise definition.

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During the last ten years, different organizations have tried to measure and monitor the proximity to what they consider sustainability by implementing what has been called sustainability metrics and indices. Sustainable development is said to set limits on the developing world. While current first world countries polluted significantly during their development, the same countries encourage third world countries to reduce pollution, which sometimes impedes growth. Some consider that the implementation of sustainable development would mean a reversion to pre-modern lifestyles.

Others have criticized the overuse of the term:

"[The] word sustainable has been used in too many situations today, and ecological sustainability is one of those terms that confuse a lot of people. You hear about sustainable development, sustainable growth, sustainable economies, sustainable societies, and sustainable agriculture. Everything is sustainable (Temple, 1992)."

2.3 SUSTAINABLE DEVELOPMENT IN ECONOMICS

The Venn diagram of sustainable development shown above has many versions, but was first used by economist Edward Barbier (1987). However, Pearce, Barbier and Markandya (1989) criticized the Venn approach due to the intractability of operationalizing separate indices of economic, environmental, and social sustainability and somehow combining them. They also noted that the Venn approach was inconsistent with the Brundtland Commission Report, which emphasized the interlinkages between economic development, environmental degradation, and population pressure instead of three objectives.

Economists have since focused on viewing the economy and the environment as a single interlinked system with a unified valuation methodology (Hamilton 1999, Dasgupta 2007). Intergenerational equity can be incorporated into this approach, as has become common in economic valuations of climate change economics (Heal,2009). Ruling out discrimination against future generations and allowing for the possibility of renewable alternatives to petro-chemicals and other non-renewable resources, efficient policies are compatible with increasing human welfare, eventually reaching a golden-rule steady state (Ayong le Kama, 2001 and Endress et al.2005) ). Thus the three pillars of sustainable development are interlinkages, intergenerational equity, and dynamic efficiency (Stavins, et al 2003).

Environmental sustainability

Environmental sustainability is the process of making sure current processes of interaction with the environment are pursued with the idea of keeping the environment as pristine as naturally possible based on ideal-seeking behavior.

An "unsustainable situation" occurs when natural capital (the sum total of nature's resources) is used up faster than it can be replenished. Sustainability requires that human

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activity only uses nature's resources at a rate at which they can be replenished naturally. Inherently the concept of sustainable development is intertwined with the concept of carrying capacity. Theoretically, the long-term result of environmental degradation is the inability to sustain human life. Such degradation on a global scale could imply extinction for humanity.

Consumption of renewable resources State of environment Sustainability

More than nature's ability to replenish

Environmental degradation Not sustainable

Equal to nature's ability to replenish

Environmental equilibrium Steady-state economy

Less than nature's ability to replenish Environmental renewal Environmentally

sustainable

The notion of capital in sustainable development

The sustainable development debate is based on the assumption that societies need to manage three types of capital (economic, social, and natural), which may be non-substitutable and whose consumption might be irreversible. Daly (1991), for example, points to the fact that natural capital can not necessarily be substituted by economic capital. While it is possible that we can find ways to replace some natural resources, it is much more unlikely that they will ever be able to replace eco-system services, such as the protection provided by the ozone layer, or the climate stabilizing function of the Amazonian forest. In fact natural capital, social capital and economic capital are often complementarities.

A further obstacle to substitutability lies also in the multi-functionality of many natural resources. Forests, for example, do not only provide the raw material for paper (which can be substituted quite easily), but they also maintain biodiversity, regulate water flow, and absorb CO2. Another problem of natural and social capital deterioration lies in their partial irreversibility. The loss in biodiversity, for example, is often definite. The same can be true for cultural diversity. For example with globalisation advancing quickly the number of indigenous languages is dropping at alarming rates. Moreover, the depletion of natural and social capital may have non-linear consequences.

Consumption of natural and social capital may have no observable impact until a certain threshold is reached. A lake can, for example, absorb nutrients for a long time while

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actually increasing its productivity. However, once a certain level of algae is reached lack of oxygen causes the lake’s ecosystem to break down all of a sudden.

Market failure

If the degradation of natural and social capital has such important consequence the question arises why action is not taken more systematically to alleviate it. Cohen and Winn (2007) point to four types of market failure as possible explanations: First, while the benefits of natural or social capital depletion can usually be privatized the costs are often externalized (i.e. they are borne not by the party responsible but by society in general).

Second, natural capital is often undervalued by society since we are not fully aware of the real cost of the depletion of natural capital. Information asymmetry is a third reason--often the link between cause and effect is obscured, making it difficult for actors to make informed choices. Cohen and Winn close with the realization that contrary to economic theory many firms are not perfect optimizers. They postulate that firms often do not optimize resource allocation because they are caught in a "business as usual" mentality.

The business case for sustainable development

The most broadly accepted criterion for corporate sustainability constitutes a firm’s efficient use of natural capital. This eco-efficiency is usually calculated as the economic value added by a firm in relation to its aggregated ecological impact. This idea has been popularised by the World Business Council for Sustainable Development (WBCSD) under the following definition: “Eco-efficiency is achieved by the delivery of competitively-priced goods and services that satisfy human needs and bring quality of life, while progressively reducing ecological impacts and resource intensity throughout the life-cycle to a level at least in line with the earth’s carrying capacity.” (DeSimone and Popoff, 1997: 47)

Similar to the eco-efficiency concept but so far less explored is the second criterion for corporate sustainability. Socio-efficiency describes the relation between a firm’s value added and its social impact. Whereas, it can be assumed that most corporate impacts on the environment are negative (apart from rare exceptions such as the planting of trees) this is not true for social impacts. These can be either positive (e.g. corporate giving, creation of employment) or negative (e.g. work accidents, mobbing of employees, human rights abuses). Depending on the type of impact socio-efficiency thus either tries to minimize negative social impacts (i.e. accidents per value added) or maximise positive social impacts (i.e. donations per value added) in relation to the value added.

Both eco-efficiency and socio-efficiency are concerned primarily with increasing economic sustainability. In this process they instrumentalize both natural and social capital aiming to benefit from win-win situations. However, as Dyllick and Hockerts point out the business case alone will not be sufficient to realise sustainable development.

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They point towards eco-effectiveness, socio-effectiveness, sufficiency, and eco-equity as four criteria that need to be met if sustainable development is to be reached.

Critique of the concept of sustainable development

The concept of “Sustainable Development” raises several critiques at different levels.

Purpose

Various writers have commented on the population control agenda that seems to underlie the concept of sustainable development. Maria Sophia Aguirre writes: "Sustainable development is a policy approach that has gained quite a lot of popularity in recent years, especially in international circles. By attaching a specific interpretation to sustainability, population control policies have become the overriding approach to development, thus becoming the primary tool used to “promote” economic development in developing countries and to protect the environment."Mary Jo Anderson suggests that the real purpose of sustainable development is to contain and limit economic development in developing countries, and in so doing control population growth. It is suggested that this is the reason the main focus of most programs is still on low-income agriculture. Joan Veon, a businesswoman and international reporter, who covered 64 global meetings on sustainable development, posits that: "Sustainable development has continued to evolve as that of protecting the world's resources while its true agenda is to control the world's resources. It should be noted that Agenda 21 sets up the global infrastructure needed to manage, count, and control all of the world's assets."

Consequences

John Baden reckons that the notion of sustainable development is dangerous because the consequences are proceedings with unknown effects or potentially dangerous. He writes: "In economy like in ecology, the interdependence rules applies. Isolated actions are impossible. A policy which is not enough carefully thought will carry along various perverse and adverse effects for the ecology as much as for the economy. Many suggestions to save our environment and to promote a model of 'sustainable development' risk indeed leading to reverse effects." Moreover, he evokes the bounds of the public action which are underlined by the public choice theory: quest by the politics of their own interests, lobby pressure, partial disclosure etc. He develops his critique by noting the vagueness of the expression, which can cover anything:

“It is a gateway to interventionist proceedings which can be against the principle of freedom and without proven efficacy. Against this notion, he is a proponent of private property to impel the producers and the consumers to save the natural resources. According to Baden, “the improvement of environment quality depends on the market economy and the existence of legitimate and protected property rights.” They enable the effective practice of personal responsibility and the development of mechanisms to

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protect the environment. The State can in this context “create conditions which encourage the people to save the environment.”

Vagueness of the term

The term of “sustainable development” is criticized because of its vagueness. For example, Jean-Marc Jancovici or the philosopher Luc Ferry express this view. The latter writes about sustainable development: "I know that this term is obligatory, but I find it also absurd, or rather so vague that it says nothing." Luc Ferry adds that the term is trivial by a proof by contradiction: "who would like to be a proponent of an “untenable development! Of course no one. The term is more charming than meaningful. Everything must be done so that it does not turn into a Russian-type administrative planning with ill effects."

Basis

Sylvie Brunel, French geographer and specialist of the Third World, develops in A qui profite le développement durable (Who benefits from sustainable development?) (2008) a critique of the basis of sustainable development, with its binary vision of the world, can be compared to the Christian vision of Good and Evil, a idealized nature where the human being is an animal like the others or even an alien. Nature – as Rousseau thought – is better than the human being. It is a parasite, harmful for the nature. But the human is the one who protects the biodiversity, where normally only the strong survive.

Moreover, she thinks that the ideas of sustainable development can hide a will to protectionism from the developed country to impede the development of the other countries. For Sylvie Brunel, the sustainable development serves as a pretext for the protectionism and “I have the feeling about sustainable development that it is perfectly helping out the capitalism”.

"De-growth"

The proponents of the de-growth reckon that the term of sustainable development is an oxymoron. According to them, on a planet where 20% of the population consumes 80% of the natural resources, a sustainable development cannot be possible for this 20%: “According to the origin of the concept of sustainable development , a development which meets the needs of the present without compromising the ability of future generations to meet their own needs, the right term for the developed countries should be a sustainable de-growth”.

Arrow et al. (2004) and other economists (e.g. Asheim,1999 and Pezzey, 1989 and 1997) have advocated a form of the weak criterion for sustainable development – the requirement than the wealth of a society, including human-capital, knowledge-capital and natural-capital (as well as produced capital) not decline over time. Others, including

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Barbier 2007, continue to contend that strong sustainability – non-depletion of essential forms of natural capital – may be appropriate.

2.4 SUSTAINABLE DEVELOPMENT IN INDIA

Sustainable development in India now encompasses a variety of development schemes in social, cleantech (clean energy, clean water and sustainable agriculture) and human resources segments, having caught the attention of both central and state governments and also public and private sectors. Social sector, cleantech investments into green energy and fuel alternatives and development schemes for backward and below the poverty line (BPL) families are being touted as some of the more heavily invested segments in India in 2009, despite the economic slowdown.

In fact, India is expected to begin the greening of its national income accounting starting next year, making depletion in natural resources wealth a key component in its measurement of gross domestic product (GDP).

The Ministry of Statistics and Programme Implementation is now readying a national database to calculate the cost of depletion of natural resources in the process of economic expansion.

Sustainable energy investment in India went up to US$ 3.7 billion in 2008, up 12 per cent since 2007. It included asset finance of US$ 3.2 billion, up by 36 per cent. Venture capital and private equity saw an increase of 270 per cent to US$ 493 million. Mergers and acquisition activities totaled US$ 585 million. Most acquisition activity was centered on biomass, small hydro and wind projects, according to a new report, Global Trends in Sustainable Energy Investment 2009.

Moreover, according to a senior official with the US Department of Energy, 60 Indian cities will be solar powered by 2020 if India is able to generate 20,000 MW of solar energy by then.

The US Department of Energy and the All India Institute of Local Self Government (AIILSG) has launched a joint training programme on 'Energy efficient and green cities' in Goa, which will train Indian experts, universities, local self governments and civic bodies on getting cities to move to solar powered energy.

India’s sustained work towards reducing Greenhouse Gases (GHG) will ensure that the country’s per capita emission of GHG will continue to be low until 2030-31, and it is estimated that the per capita emission in 2031 will be lower than per capita global emission of GHG in 2005, according to a new study. Even in 2031, India’s per capita GHG emissions would stay under four tonnes of CO2, which is lower than the global per capita emission of 4.22 tonnes of CO2 in 2005.

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Corporate Initiatives

Global systems and services company Dell, in partnership with The Energy and Resources Institute (TERI), has launched ‘The Climate Eduxchange’ – an IT-enabled initiative to improve environment education in schools across India. The campaign aims to raise awareness and understanding about climate change issues among students and teachers of all disciplines.

Moreover, Dell has banned the export of non-working electronics to developing countries as part of its global policy on responsible electronics disposal.

SOS Children’s Villages of India and Coca-Cola India announced the commencement of work on 24 million litres of rainwater harvesting (RWH) project at SOS Children’s Village in Aluva near Kochi. The project, on completion, will help ensure safe drinking water for children and nearby communities.

Clean Energy and Technology

The Energy Efficiency Indicator (EEI) survey for corporate India, released recently, reveals that 47 per cent of the respondents are paying more attention to energy efficiency, compared to last year and 94 per cent of the respondents feel that energy management is extremely important. An increase in capital investments for energy efficiency is needed, say 62 per cent, while 72 per cent of the respondents feel their organisations can achieve more energy efficiency from operating budgets. More than 92 per cent of the respondents say energy efficiency is a priority in new construction as well as in renovation projects.

Corporate Investments

Investors from the US and European countries are keen to invest around US$ 416.4 million to promote and equip small and medium enterprises engaged in green business such as advance technologies for water management, agriculture/organic products, clean technologies, ecotourism, renewable energy, green building materials, etc.

PV Technologies India (a subsidiary of Moser Baer), Titan Energy Systems, Reliance Industries Ltd, Tata BP Solar Power are among the 12 Solar Photo Voltaic projects filed under Special Incentive Package Scheme (SIPS), which have received in-principle clearance from the Government. Together, these 12 projects would entail an investment of US$ 16.34 billion over a 10-year period.

Finnish company WinWind Power Energy opened its US$ 77.5 million wind turbine-cum-blade manufacturing facility near Chennai.

Clinton Climate Initiative (CCI), a programme of US-based William J Clinton Foundation, has signed a memorandum of understanding (MoU) with Gujarat government for setting up 5 solar parks in Gujarat. The proposed 3000 MW solar power project will see an investment of over US$ 10.3 billion.

International Finance Corporation, a member of the World Bank Group, has proposed to be an investor in South Asia Clean Energy Fund (SACEF) by investing US$ 20 million. SACEF aims to raise US$ 200 million. The fund will

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target companies located in India and will also eye regions like Sri Lanka, Bangladesh and Nepal.

Government Initiatives

The government has formulated the National Policy on Biofuels and given its approval for setting up the National Bio-fuel Coordination Committee and Bio-Fuel Steering Committee. Under the policy, it targets increasing the blending of biofuels with petrol and diesel to 20 per cent by 2017.

Indian Renewable Energy Development Agency (IREDA) will be investing around US$ 3.39 billion for the development of renewable energy (RE) sector projects during the 11th Five Year Plan. As per Planning Commission estimates, RE projects worth US$ 15.97 billion, (expected to generate 15,000 mw power), is likely to come up in the Plan.

The government is considering a regulation to make use of renewable energy mandatory for special economic zones (SEZ) to save on traditional fuel like coal and diesel.

India is likely to spend over US$ 20.4 billion on setting up of power plants based on renewable energy sources by the end of 2011-12.

The Prime Minister’s Council on Climate Change has given an in-principle nod to the National Mission on Enhanced Energy Efficiency. Under the Mission, energy efficiency improvement targets will be assigned to the country’s most energy-intensive industrial units. Other Mission initiatives include expanded use of the carbon market to help achieve market transformation towards more energy-efficient equipment and appliances, and the creation of two funds to help channel investment into energy-efficiency projects.

2.5 ENVIRONMENT VS DEVELOPMENT

If deterioration of the global environment over the past several decades is any guide, the coming century does not hold out much promise for reversing these trends, many environmentalists are warning as the millennium comes to a close. Rising Earth temperatures, record losses in biodiversity and species extinction, increasing demands and dwindling supplies of fresh water, only seem to be getting worse.

'If I look at the global environmental trends that we have been tracking since we first launched the Worldwatch Institute 25 years ago, and if I simply extrapolate these trends a few years into the next century, the outlook is alarming to say the least,' says Lester Brown, president of the Washington-based think-tank. On the up-side, the past several decades has seen citizens and environmental groups, or non-governmental organisations (NGOs), worldwide pulling together in unprecedented numbers to pressure governments to pass laws to protect the ozone layer, ban toxic chemicals in the environment, reduce air and water pollution, and protect endangered species and habitats. Seeking a balance between economic development and environmental protection, NGOs have played a

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major role in shaping international environmental treaties, including the UN Convention on Biological Diversity, the Kyoto Protocol on Climate Change, and the Basel Convention, which bans exporting hazardous wastes from industrialised nations to developing countries.

Yet as the millennium pulls to a close, the political and financial structure of the world economy, which has become increasingly dominated by powerful multinational corporations, is directly at odds with efforts to promote a healthy Earth, executive director of the Transnational Resource and Action Centre, the San Francisco-based corporate watchdog.

One clear example of this has been the success of powerful multinational oil and gas industries in swaying the US Senate against ratifying the Kyoto Protocol on climate change, an international treaty seeking to reduce emissions of heat-trapping 'greenhouse' gases. Scientists believe that such emissions, caused by the burning of fossil fuels, will warm the Earth and result in drastic climate change, including increasing the intensity and frequency of floods, droughts, and storms.

If current record-breaking warming trends continue, average global temperatures could rise between 1 and 3.5 degrees centigrade by the year 2050, according to expert studies. 'The challenge in the 21st century is to replace the corporate-dominated paradigm that worships the bottom-line with a framework that puts the environment, human rights, and labour rights first. In the past several decades, NGOs have applied a diverse array of strategies to counter corporate power including promoting laws to protect the environment, developing lawsuits against governments and corporations, and passing company shareholder resolutions.

Citizens in Ecuador, who see their own country's court systems as inadequate, for example, have been attempting to hold US oil giant Texaco accountable for its past operations, by suing the company in US courts. Similar suits have been filed in the US court system against UNOCAL and Chevron for their activities abroad. While praising these efforts, Peter Montague, director of the Maryland-based Environmental Research Foundation, says the environmental movement must pay closer attention to how the push for trade liberalisation is eroding the power of nation-states. NGOs will become irrelevant if national governments lose their capacity to govern because power has been transferred to international trade bodies.

After the passage of the North American Free Trade Agreement (NAFTA), for example, a US firm complained that it had been illegally prevented from opening a waste disposal plant because of environmental zoning laws in the Mexican state of San Luis Potosi. Through NAFTA, Metalclad corporation sought some $90 million in damages since it said state authorities were - against trade rules - prohibiting it from making a profit since they declared the site an ecological zone and refused to allow the firm to reopen the facility.

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Similarly, many domestic environmental regulations - which NGOs have worked very hard to pass into law - have been challenged through the World Trade Organisation (WTO) and hence weakened or abolished, warn environmentalists. The United States, for instance, gutted provisions of the Marine Mammal Protection Act, the Clean Air Act, and its Endangered Species Act after these environmental policies were challenged before the WTO, according to a recent report released by Public Citizen, a Washington-based NGO founded by consumer advocate Ralph Nader. This undemocratic trend must be reversed and power must be returned to governments.

Citizen groups and environmental organisations have been trying to guide global trade by pressuring governments to attach environmental provisions to trade agreements and pressure international financial institutions like the World Bank, to adopt minimal environmental and social standards for funding projects. Using lessons from studying these institutions, environmental groups, including Indonesia-based Bioforum and Friends of the Earth Japan, have begun a new campaign to reform public export-credit lending agencies which operate without social and environmental standards.

Designed to help a nation's firms compete for business abroad, these agencies provide publicly backed loans, guarantees and insurance to corporations seeking to do business in developing countries. Another challenge in the coming decades is genetic modification and environmentalists say they will keep a close watch on companies such as Novartis and Monsanto, which are heavily pushing their new technological innovations in biological engineering. 'We are in the midst of a radical, historic transition - from the Industrial Age to the Biotechnical Age,' says Jeremy Rifkin, president of the Washington-based Foundation on Economic Trends in his book, The Biotech Century.

Environmental groups, including Greenpeace and the Union of Concerned Scientists, worry that the mass release of thousands of genetically engineered crops into the environment will cause 'super-weeds' through unintentional cross-breeding and hence irreversible damage to the Earth. Mass extinction of plant, animal and insect species will also be a trend environmentalists hope to reverse. John Tuxill, a researcher at the Worldwatch Institute, says that as critical habitat is logged or developed, extinction rates have accelerated this century to at least 1,000 species per year. 'These numbers indicate we now live in a time of mass extinction - a global evolutionary upheaval in the diversity and composition of life,' he says. 'What we need now is a rapid shift in consciousness, a dawning awareness in people everywhere that we have to shift quickly to a sustainable economy if we want to avoid damaging our natural support systems beyond repair,' says the Institute's founder Lester Brown.

For such a shift to happen, environmental organisations need to focus on organising people at the community level and working closely with other social movements, such as the human rights and civil rights movements. The power of civil disobedience and mass movements has been harnessed and then forgotten at different points in the century, But the huge upcoming challenge, will be to ensure that discontent with corporate-led globalisation is not captured by nationalist xenophobic responses such as the rise of right-wing militia groups in the United States, India's BJP party or France's Jean-Marie Le Pen.

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Instead, environmental and related movements need to work hard to harness the discontent with corporate power to promote democratic responses that value human rights and multi-racial and multi-ethnic responses to solving the problems.

Activity 2

1. Define sustainable development. Discuss its scope and its relevance in economics.2. Discuss Indian government initiatives to achieve sustainable development in long

run.3. What are the trade off of environment and development? How these problems

could be solved using the approach of sustainable development?

2.6 SUMMARY

Sustainable Development stands for meeting the needs of present generations without jeopardizing the ability of futures generations to meet their own needs – in other words, a better quality of life for everyone, now and for generations to come. It offers a vision of progress that integrates immediate and longer-term objectives, local and global action, and regards social, economic and environmental issues as inseparable and interdependent components of human progress. Further in the unit it has been discussed that environment protection is equally important area of consideration which will not be brought about by policies only it must be taken up by society at large as a principle guiding the many choices each citizen makes every day, as well as the big political and economic decisions that have. This requires profound changes in thinking, in economic and social structures and in consumption and production patterns.

2.7 FURTHER READINGS

Book Review on An Introduction to Sustainable Development by Peter Rogers, Kazi Jalal, & John Boyd Sustainability: Science, Practice, & Policy, Published online June 18, 2008

Pezzey, J; M. Toman (January 2002). "The Economics of Sustainability:A Review of Journal Articles". Resources for the Future DP 02-03: 1-36.

Mark Jarzombek, "Sustainability - Architecture: between Fuzzy Systems and Wicked Problems," Blueprints 21/1 (Winter 2003),

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UNIT 3

MACRO ECONOMIC POLICIES AND ENVIRONMENT

Objectives

After studying this unit you should be able to:

Understand the fundamental issues of macroeconomics and sustainability Analyze the new microeconomic policy for the 21st century

Have the knowledge of environmental and economic accounting

Appreciate the concept of environmentally corrected GDP

Structure

3.1 Introduction3.2 Fundamental issues of macroeconomics and sustainability3.3 Redefining microeconomic theory and policy for the 21st century3.4 Environmental and economic accounting – the integrated approach3.5 Environmentally corrected GDP 3.6 Summary3.7 Further readings

3.1 INTRODUCTION

The trend in mainstream economic thought about macroeconomic policy has been towards minimalism. In the optimistic Keynesian phase of the 1960's, it was assumed that both fiscal and monetary policy were effective tools for macroeconomic management. But the influence of monetarist and New Classical critiques has led to a gradual erosion of theoretical support for activist government policy. First fiscal policy fell by the wayside, perceived as too slow and possibly counterproductive in its impacts. Then New Classical and rational expectations critiques suggested that even monetary policy was ineffective. Thus the role of government policy has been reduced to a cautious effort not to make things worse but in effect a return to an economics of laissez-faire.

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In contrast, a sustainability perspective implies that radical and proactive government policies are required to achieve economic development that is both socially just and ecologically sound. The path of laissez-faire leads to increasing intra- and international inequality as well as increasing environmental destruction. To some extent the course of market economies can be steered through the use of sound microeconomic policies. But the fundamental redirection required for sustainable development cannot be achieved without reorienting macroeconomic policy also.

Many of the basic tenets of macroeconomic policy need to be redefined in the context of current global problems. The objectives of macroeconomic policy should include economic stabilization, distributional equity, broad social goals such as income security, education, and universal health care, and the management of economic growth. There is an increasing recognition that the achievement of social goals is essential to environmental sustainability. Regarding growth, while earlier macroeconomic theorists generally assumed that growth was good, ecological economists such as Herman Daly have suggested that growth should be limited and that a sustainable economic scale, rather than exponential growth, should be the goal of macroeconomic policy.

The time is ripe for a reassessment of macroeconomic theory and policy. The goal should be to provide a theoretical basis for the reorientation of macro policy at the national and international levels, linking efforts to promote local-level sustainability and equity with greening and restructuring of multilateral institutions.

Many macroeconomic policies have an indirect and a wide spread impact on the countries ' resources and the environment'. Stabilization and structural adjustment programs aim for a stable economy over the long run. Macro economic policies may or may not be successful in generating economic growth but these policies have an indirect impact on the environment due to changes in income, taxes, subsidies, public revenue and innovative capacity. Many studies have analyzed the effect of stabilization and structural adjustment on the environment (Markandya 1994; Munasinghe and Cruz 1995; Reed 1996; Lopez et.al. 1998; Munasinghe et al. 2000).

The issues of interest are:

1. How could one assess these impacts?2. What actions if any need to be taken to correct the negative environmental effects.

Major economic reforms that are likely to affect the environment are the short-term stabilization programmes (Fiscal policy, monetary policy, and Exchange rate policy), medium-term structural and Sectoral Adjustment Programmes (trade liberalization, domestic pricing policies, non price incentives).The box below summarizes the major environmental linkages.

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Many macro economic policies have an impact on poverty and thereby, it is claimed, on the environment. Poverty and environmental degradation have been studied by looking at how the two are correlated over time, as well as how they are correlated across society at a given point in time. Along with the poverty, for a fuller appreciation of macro economic policy impacts it is important to look at the linkages between population and environment. This is because there is a wide spread perception that high population density and high rates of population are a direct cause of environmental degradation.

3.2 FUNDAMENTAL ISSUES OF MACROECONOMICS AND SUSTAINABILITY

As the concept of sustainable development has been refined and developed, many new perspectives on economic theory and policy have been introduced. An overview of work on sustainable development recently published by the Global Development and Environment Institute includes significant contributions on the topics of: natural capital, current and inter-generational equity, “green” accounting, “green” tax reform, growth and the environmental kuznets curve debate, trade and structural adjustment, globalization, and international institutional reform. It seems evident that these multi-faceted theoretical and practical issues arising out of the overlap between environmental, social, and economic analysis should have major implications for macroeconomic policy. But there is as yet little work on reforming macroeconomic theory and policy to take account of sustainability.

There has been discussion of a variety of microeconomic policies which can promote environmental sustainability. But what is implied regarding macroeconomic policy? Since Herman Daly first called for an environmental macroeconomics a decade ago, there has been relatively little forward progress on this issue – certainly none that has penetrated the mainstream of macroeconomic theory, practice, and teaching. There have been new approaches to macroeconomic measurement, taking into account economic and social factors. A recent article by Anthony Heyes suggests a modification of macroeconomic IS-LM analysis to include environmental constraints (of which more later). This is a welcome response to Daly’s call for environmental macroeconomics, but there have not been many other such responses.

The question is especially tantalizing since there are signs that this may be a moment of opportunity for influencing, and altering, mainstream macroeconomics. The field has strayed far from its Keynesian origins, and in doing so has become, like other areas of standard economics, highly abstract and mathematical. But at the same time there are some influential voices within the mainstream, such as former World Bank chief economist Joseph Stiglitz, decrying the decoupling of macroeconomic theory from real-world problems, and calling for a reorientation. Stiglitz’ main concern is not environmental, but he does point to the social devastation wrought in many developing nations by the so-called “Washington consensus” on macroeconomic policy.

The long-term trend in mainstream economic thought about macroeconomic policy has been towards minimalism. In the optimistic Keynesian phase of the 1960's, it was

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assumed that both fiscal and monetary policy were effective tools for macroeconomic management. But the success of monetarist and New Classical critiques led to a gradual erosion of theoretical support for activist government policy. First fiscal policy fell by the wayside, perceived as too slow and possibly counterproductive in its impacts. The focus moved to central bank monetary policies as the only practical means of government intervention, with the limited goal of price stability. Then rational expectations and New Classical critiques suggested that even monetary policy was ineffective. Thus the role of government is reduced to a cautious effort not to make things worse – in effect a return to an economics of laissez-faire.

By contrast, the sustainability perspective implies that radical and proactive government policies are required to achieve economic development which is both socially just and ecologically sound. The path of laissez-faire leads to increasing inter- and intra-national inequality and increasing environmental destruction. To some extent the course of market economies can be steered through the use of sound microeconomic policies. But the fundamental redirection required for sustainable development cannot be achieved without reorienting macroeconomic policy also. Substantial changes in economic policy are needed in order to promote sustainability as well as more traditional economic goals of efficiency, increased consumption (in the sustainability perspective, for those who need it) and macroeconomic stability. In particular, environmental and social dimensions must be integrated into economic policy.

It is therefore worthwhile to return to the basic goals of macroeconomic policy, as set forth by Keynes, his contemporaries, and his immediate successors, and to ask the question whether some of the essential elements of macroeconomics have been lost in the last half-century of evolution of economic thought. “New occasions teach new duties”: the appropriate macroeconomic goals for the twenty-first century are very different from those which confronted Keynes and his colleagues in the immediate post-World War II period. Yet there are similarities in the scope of problems on a global scale which suggest that the broader view taken at an earlier stage in economic thought may be relevant as we consider new issues unforeseen fifty years ago.

A Broad View of Macroeconomic Policy Goals

Let us review some of the basic functions of macroeconomic policy, broadly conceived.

1. Economic stabilization, avoiding excessive inflation or recession – the best known function, which has often but mistakenly been viewed as the only appropriate goal for macro policy.

2. Distributional equity, which played an important role in early Keynesian analysis and in the work of Sraffa, Kaldor, Joan Robinson, and Kalecki.

3. The achievement of broad social goals, such as income security, education, and universal health care. These were integral to “New Deal” Keynesian policies, but have become incidental in economists’ purely quantitative analysis of the macroeconomy.

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4. Providing a stable basis for economic development. The dynamics of economic growth were explored by Harrod and Domar and later Solow. These theorists generally assumed that growth was good, considering an ultimate steady-state economy only as a theoretical construct. More recently, ecological economists such as Daly have suggested that growth should be limited and that a sustainable economic scale, rather than exponential growth, should be the goal of macroeconomic policy. Within mainstream economics, the development of endogenous growth theories, taking into account the role of human and potentially of natural capital in long-term growth, provides another perspective on the importance of policy determinants of growth.

The recent macroeconomic crises in Asia and Japan suggest that the first function is more important than implied in the modern, laissez-faire-oriented approach to macroeconomics. The tendency of unregulated capitalist economies to excessive cycles of boom and bust, emphasized by Keynes and dismissed by New Classicists, has been re-explored by Krugman in the light of the Asian crisis.

The importance of the second and third functions has been emphasized by critiques of International Monetary Fund (IMF) and World Bank structural adjustment policies, including those by Joseph Stiglitz. Contractionary macroeconomic policies have devastating effects on social equity, as well as on income distribution, with the heaviest burden of economic contraction being borne by the poorest. Expansionary, export-led growth is no panacea: growing income inequality and loss of social safety nets threatens the “success stories” of rapidly developing nations such as China. Issues of fairness in distribution and social investment need to be included in a redefined set of economic policy goals.

Regarding the fourth function, even the World Bank acknowledges that the scale of global growth poses enormous environmental problems for the twenty-first century. Whether or not Daly’s approach to growth limits is adopted, it is clear that economic growth needs to be steered in an environmentally sustainable direction, implying some degree of macroeconomic planning (not in the sense of a centrally-planned economy, but in the sense of indicative planning for long-run energy and resource use, as implied for example by the Kyoto process).

All four functions, not just the first, will be important in the macroeconomics of the twenty-first century. This will require a rethinking and reorientation of both theory and policy, at the national and international levels.

3.3 REDEFINING MACROECONOMIC THEORY AND POLICY FOR THE TWENTY-FIRST CENTURY

A macroeconomics that is consistent with sustainable development must return to, and expand upon, the fundamental principles of Keynes, without the dilution inherent in the neoclassical interpretation. An initial list of the characteristics of such a macroeconomics should include:

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Simplicity and transparency

This appears to contradict the post-Walrasian emphasis on complexity. But we should remember that consistency is the hobgoblin of little minds, and that great ideas are typically capable of fairly simple expression. Even a theory involving great mathematical complexity in its formal derivation may have fairly straightforward policy conclusions.

One of the great problems with current macroeconomics is that, unlike the relatively simple microeconomics of markets, it is enormously confusing. After following many tortuous arguments about expectations, shocks, rigidities, and short- and long-term effects, the student of macroeconomics is likely to be totally confused. One macroeconomics text lists seven different explanations for recession: traditional Keynesianism, misperception theory, real business cycle theory, sectoral shift models, and new Keynesian theories of wage and price rigidities, coordination failures, and political business cycle theory – each with completely different policy implications.

In contrast, an ecologically oriented macroeconomics should focus on a simple basic principle: since unregulated markets are volatile and often socially and environmentally disruptive, informed government intervention using fiscal, monetary, and other policy tools is essential. There can be differences over the appropriate policy mix, but there can be no doubt that an activist government role is required to promote economic, environmental, and social sustainability.

Promotion of social goals

The more radical formulation of the Keynesian critique is fatal to the concept of market “optimality”. Once the self-regulating Walrasian world evaporates, it becomes apparent that many social goals can only be achieved through collective action using democratic institutions of governance. Thus the need for government intervention is more than simply a technical requirement for macroeconomic stability. It represents the only feasible way of achieving goals which are essential for well-being, and which are not supplied, or inadequately supplied, through the market.

The implicitly anti-democratic free-market paradigm insists that dollar votes should rule and the public sphere should be minimized. While conservative economists are free to argue this as their political preference, they should not be able to appeal to any supposed professional consensus to justify it. A realistic macroeconomics requires a different approach, which is why New Classical theorists have attempted to reduce macroeconomics to non-existence. The reassertion of a distinct macroeconomic theory involves, as Keynes recognized, an essential role for social choice. This, not free-market ideology should be the main message of economists to policy-makers and the public.

Concern for equity

Even the World Bank has acknowledged that “equity also remains a central concern of the state.” As we have noted, earlier Keynesian theories placed emphasis on equitable

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distribution, both as a social goal and to promote a more stable macroeconomic system. In addition, as Adelman and Amsden have argued, equitable distribution is a strong precondition for effective economic growth in developing economies. In a world of ecological limits, issues of equity take on a particular importance since increased consumption for the poor may depend on moderated consumption by the rich. This reality calls for new attention to the preconditions for macroeconomic stability with limited consumption growth.

Environmental protection and growth limits

These issues were not on Keynes’ agenda, but as Daly and others have emphasized, they must be an essential part of a twenty-first century macroeconomics. Heyes proposes the addition of an EE schedule indicating environmental equilibrium to the standard IS-LM diagram. The EE schedule is an interesting construction, since it depends both on the installation of environmentally cleaner technology, assumed to be related to the real interest rate (which determines the slope of EE), and on the level of environmental regulation in the economy (which determines its placement). It is not clear whether environmental factors can truly be captured by such a relatively simple formulation (just as IS-LM itself tends to oversimplify macroeconomic relationships). However, a fairly clear and commendable implication of the IS-LM-EE analysis is that economic growth must be accompanied by cleaner technology and stronger environmental regulation. In this sense, Heyes’ proposal fits well with our earlier admonition that ecological macroeconomics should have straightforward and comprehensible policy implications.

Sustainable trade policies

One of the important aspects of the expanding critique of free trade and globalization is the issue of control of macroeconomic policy. Critics of free trade have pointed to its negative environmental and social effects, and its tendency to expand corporate power. An equally important concern is the tendency of regional and global free-trade regimes to remove fiscal and monetary policy from national control. This is at issue, for example, in the attempt to promote a common currency within the European Union.

Extensive opposition in Britain and other countries has forced European leaders to retreat on their timetable for the euro. What reasons do people have to be concerned about this issue, other than affection for traditional currencies? Very good reasons. Not only is national cultural autonomy weakened by a soulless euro, but more substantively, control over monetary policy passes from elected national governments and their central banks to a European authority whose democratic mandate is at best weak. People sense that this represents an important aspect of loss of control over their economic destinies.

In the Asian crisis, countries like Malaysia and China, with controls on capital movements, were to some degree isolated from the recessionary contagion. In the wake of the crisis, Joseph Stiglitz and others have criticized the ideological dogmatism that led to an insistence on eliminating barriers to capital movement in East Asia in the name of free trade. While this led to short-term profit opportunities for international financial

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institutions, it left the area vulnerable to massive speculative capital flows – something which Keynes warned about, and which has led James Tobin to propose the “Tobin tax” on international capital movements.

International institutional reform

Keynes and others similarly minded were instrumental in setting up the Bretton Woods institutions to provide international macroeconomic stability. By the end of the century, these institutions were showing their age. One major problem is the lack of global environmental institutions, or of any prominent place for environmental concerns in the mandates of existing institutions. Another is the capture of international monetary policy-making by economists oriented towards contractionary “classical medicine” approaches. As Paul Streeten has long advocated, this approach disserves development and should be replaced by more aggressive policies aimed at recirculating capital and disseminating technology to promote sustainable development.

The development of such institutions and policies involves a careful consideration of which macroeconomic policy functions are best performed at a national, and which at an international level. Given the other goals of environmental protection and equity mentioned above, the current combination of rapid globalization and classically-oriented contractionary policies is clearly inappropriate, and it is not surprising that it has led to growing resentment and opposition.

3.4 ENVIRONMENTAL AND ECONOMIC ACCOUNTING – THE INTEGRATED APPROACH

Growing pressures on the environment and increasing environmental awareness have generated the need for countries to accurately value and account for their environmental and natural resources as a means of developing appropriate economic, trade and sustainable development policies.

Existing systems of national accounts generally do not take account of the impacts of economic and trade activity on resource potentials. National accounts include physical capital as an asset that depreciates over time, but they largely fail to include the depletion of natural capital, which is treated not as a liability but as an income. Similarly, national accounts fail to reflect social factors such as income distribution and poverty reduction. To provide policy makers with more accurate information on progress towards sustainable development and poverty reduction, efforts are required to integrate the environment into national accounts.

The System of Integrated Environmental and Economic Accounting (SEEA) is a tool that can help track natural resource depletion and environmental degradation. Sine the early 1980s, UNEP has been promoting and facilitating the development of this tool in collaboration with the World Bank, the UN Statistical Division, and other organizations. Since the early 1990s, UNEP through ETB has also supported a number of country projects, sponsored a series of workshops, and worked with partners in preparing a

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practical handbook entitled “Operational Manual on Integrated Environmental and Economic Accounting”. In 2004, UNEP ETB convened a meeting together with UNSD to identify gaps, needs and priorities for moving this work forward. This meeting led to the establishment of a UN Expert Committee on Environmental-Economic Accounting. Within this process, UNEP-ETB developed a Virtual Resource Center with a searchable database for various materials and internet links related to integrate environmental and economic accounting. In response to emerging priorities, UNEP ETB is currently exploring opportunities to work with partners on issues related to the measurement and accounting of carbon storage and other ecosystem services.

The System of Environmental-Economic Accounting 2003 (SEEA-2003)

The SEEA-2003 is a satellite system of the System of National Accounts (SNA), which is the standard system for organizing economic information. As such, it has a similar structure to the 1993 SNA and shares common definitions and classifications. It provides an integrated set of aggregate environmental and economic information from which indicators of performance can be derived. These can be at the sectoral and macroeconomic level, as well as at more detailed levels, and may guide resource managers and policy makers alike.

The SEEA-2003 provides a set of definitions, classifications, statistical accounts and tables to analyse the interactions between the economy and the environment. It provides a framework for organizing environment and energy statistics together with economic information using common concepts, definitions and classifications. It also enables to analyze links between different environmental domains (e.g. between energy, pollution, land, water, etc).

By bringing the concepts, definitions and classifications of environment and energy statistics closer to those of environmental-economic accounting, the potential use of the data available in both the environment and economic spheres is increased. The SEEA-2003 allows for the incorporation of the environment and energy statistics directly into the national accounting framework, an important tool for economic planning and policy determination. It significantly improves the likelihood that environmental information is considered more fully in economic decision-making process. In short, the SEEA-2003 provides an integrated framework allowing tradeoffs to be examined.

The integration of information on the economy and energy allows decisions and policies to be designed, analysed and reviewed for effectiveness. In the case of energy and associated air emissions, policy makers need to be aware of the likely consequences for the economy of implementing or increasing targets for reducing air emissions. Similarly, those industries making extensive use of energy resources in production processes need to be aware of the long-term consequences of their use on the environment (e.g. increased temperatures, reduced water availability).

Linking the environment and energy statistics to the accounting framework also increases the checks and balances in the data. It can improve data quality and produce consistent

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data system from individual sets of environment and energy statistics. The system improves consistency over time and enables comparisons between countries.

The accounting system has substantial analytical value. By integrating economic and environmental and energy accounts it becomes possible to develop a coherent and consistent set of indicators to examine the implications for different patterns of production and consumption of the environment and energy resources, or conversely, to examine the economic consequences of maintaining given environmental standards. Because economic activities and their environmental impacts, in terms of resource use and emissions, can be compared directly, the system makes it possible to calculate intensities and to derive various kinds of indicators. Moreover, since it uses an input-output structure it can be used for modelling; for example the impact of introducing specific energy taxes on resource consumption and emissions.

The SEEA 2003 comprises four categories of accounts:

Flow accounts for pollution, energy and materials (Chapters 3 and 4). These accounts provide information at the industry level about the use of energy and materials as inputs to production and the generation of pollutants and solid waste.

Environmental protection and resource management expenditure accounts (Chapters 5 and 6). These accounts identify expenditures incurred by industry, government and households to protect the environment or to manage natural resources. They take those elements of the existing SNA which are relevant to the good management of the environment and show how the environment-related transactions can be made more explicit.

Natural resource asset accounts (Chapters 7 and 8). These accounts record stocks and changes in stocks of natural resources such as land, fish, forest, water and minerals.

Valuation of non-market flow and environmentally adjusted aggregates (Chapters 9 and 10). This component presents non-market valuation techniques and their applicability in answering specific policy questions. It discusses the calculation of several macroeconomic aggregates adjusted for depletion and degradation costs and their advantages and disadvantages. It also considers adjustments concerning the so-called defensive expenditures.

The revision process of the SEEA-2003

After the finalization of the SEEA-2003, countries felt that it was timely to focus efforts on elevating environmental-economic accounting to an international statistical standard, mainstreaming it in national statistical offices and promoting its uses in the users’ community. In 2005, the UN Statistical Commission approved the creation of the UN Committee of Experts on Environmental-Economic Accounting (UNCEEA), a strategic body responsible for bringing forward the above objectives.

The following five main elements of work identified for the UNCEEA include:

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(a) Coordination: It was felt that a stronger coordination, in particular among the international agencies active in the environmental field, would be necessary in order to raise the profile of environmental-economic accounting;

(b) Promotion of the accounts: Since environmental-economic accounting is a new area of statistics, the United Nations Statistical Commission underscored the need for raising awareness of the uses of the accounts through the promotion of environmental-economic analysis and formulating international priorities based on canvassing users’ needs;

(c) Methodological research: SEEA 2003 is a handbook of best practices. When a consensus could not be reached, a list of options, rather than a single recommendation, was presented. The UNCEEA has been entrusted by the Statistical Commission to organize and steer the process of the revision of the SEEA-2003 to elevate it to an international statistical standard;

(d) Technical Cooperation: With the publication of SEEA, it was considered timely to develop an implementation strategy in countries. The Committee would play a role in coordinating development of training material and foster exchanges of best practices as well as maintaining a list of on-going country projects so as to avoid duplication of efforts;

(e) Harmonization of data collection activities with environmental accounting concepts and definitions. It was considered important that environment and related statistics becomes firmly aligned with environmental-economic accounting.

At its last meeting in June 2006, the UNCEEA identified energy accounts as an important topic to be included prominently in the revision of the SEEA-2003. The UNCEEA considered that the methodology is well advanced and there exists considerable practical experience in countries to warrant the elevation of energy accounts to international statistical standard.

The UN Committee is now working on the preparation of a project management framework for the revision process of the SEEA-2003. The framework will delineate the role and responsibilities of the various groups involved in the revision process; including the governance structure, finalize an agreed research agenda including a list of issues to be addressed with timelines and deliverables. The London Group on Environmental Accounting, given its expertise and role in the advancement of methodologies in environmental-economic accounting, has been asked and has agreed to assist the UN Committee of Experts in addressing a large number of issues which will be included in the agreed research agenda for the revision of the SEEA- 2003.

Given the leading role of the Oslo Group in advancing methodologies in energy statistics, the Committee considered important to develop cooperation with the Oslo Group. To this end, the Chair of the UNCEEA requested the Chair of the Oslo Group to consider

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accepting to develop and solve a list of issues on energy accounts to be included in the research agenda for the revision of the SEEA-2003.

3.5 ENVIRONMENTALLY CORRECTED GDP

Measurement of Net National Product (NNP) taking in to account the externalities of using natural resources requires the generalization of conventional national income accounts to be done for the economy. Conceptually these generalizations could be done as in the UN methodology of integrated environmental and economic accounting (UN, 1993) and in other recent attempts that use input-output models. However, there is a large gap between what is empirically achieved so far and the requirement of these generalized methods of accounting. These methods require an aggregation of changes in natural resource stocks at the micro level or an aggregation of changes over the firms and households to arrive at changes at the level of sectors and from the sector to the macro or national level aggregates. There are formidable empirical problems in measuring the changes in resource stocks introduced by firms or projects and the monetary valuation of these changes.

The UN methodology describes the generalization of production and use accounts for different sectors in the economy without explaining how the aggregation of changes in natural resources stocks introduced by firms and households could be done. The depletion of resource stock at the macro level could be unambiguously measured in the case of exhaustible natural resources while there are difficulties in measuring depletion in the case of environmental resource stocks.

Production and use accounts at the sector or macro level could be prepared by simply adding the firm-level production and uses of fossil fuels or minerals or ores. The market determined resource rents could be used to prepare the monetary accounts of depletion of exhaustible resources. However in the case of environmental resource stocks, the depletion and the monetary valuation of it could be firm or region-specific. For example, in the case of atmospheric quality measured in Particulate Matter (PM10), the depletion should be with reference to an airshed and the in the case of water quality measured in Biological Oxygen Demand (BOD) it should be in the context of a watershed. The valuation of environmental quality measured either in terms of cost of improving it or in terms of benefits to the households could be also region or site- specific. Therefore for the environmental resource stocks, region or project specific, physical and monetary accounts have to be developed. While the national-level physical accounts of environmental changes could not be developed from the regional accounts the aggregate monetary accounts could be developed. Detailed micro level studies of environmental resource accounting provide micro foundations of integrated environmental and economic accounting for measuring the Green GDP of countries.

Environmentally Sustainable GDP

Measurement of environmentally sustainable income requires a system of national accounts that integrates the environmental and economic problems. There are many

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definitions of sustainable income. The general view about sustainable income is that it is the maximum attainable income in one period with the guarantee that the same level of income will be available in future periods given the constraints on the resources, viz. labor, man made capital and natural capital. Therefore, income is directly related to the availability of man made and natural capital. Sustainable income defined in this way represents the welfare of the nation and there is a lot of discussion in the literature about whether the Net National Product (NNP) would appropriately represent it. Samuelson (1961) has argued, the rigorous search for a meaningful welfare concept leads to a rejection of current income concepts like NNP and arrives at something closer to a wealth like magnitude such as the present discounted value of future consumption. However, Weitzman (1976) has shown that in theory, the NNP is a proxy for the present discounted value of future consumption.

It is long recognized that the conventional system of national accounts (SNA) to measure NNP has treated environmental resources and their role in the economy inconsistently. Under SNA, NNP increases when natural resource stocks are depleted and the quality of environment is reduced by pollution. As could be seen in Section 2 of this chapter, the correct approach to natural resources accounting is to account for the depletion of natural resources and the fall in the environmental quality in estimating the NNP. There is now a lot of literature about the problem of estimating NNP and the sustainable use of natural resources. Studies by Solow (1974) and Hartwick (1977, 1978a,b) have tried to derive the conditions under which real consumption expenditure might be maintained despite declining stocks of exhaustible resources (fossil fuels, minerals and metals). The main result of these studies known as the Hartwick rule, states that consumption may be held constant in the face of exhaustible resources only if the rents deriving from the inter temporally efficient use of those resources are reinvested in the reproducible capital.

The main criticism about the Solow-Hartwick definition of sustainable income is that the manmade capital could not be substituted to natural capital. Natural capital can be exploited by man, but cannot be created by man. According to the thermodynamic school (Christensen, 1989), natural capital and manmade capital are not substitutable. One can think of two subsets of inputs, one containing the natural capital stock ‘primary inputs’ and another contain manmade capital and labor ‘agents of transformation’. The substitution possibilities within each group can be high while they are limited between the groups. Increasing income means increasing the use of inputs from both groups Given the limited substitutability between manmade capital and natural capital, it is necessary to maintain some amount of the natural capital stock constant in order to maintain the real income constant at the current level over time (Pearce et al., 1989; Klaasen and Opschoor, 1991; Pearce and Turner, 1990). This can be a heavy restriction on development if the current levels of natural capital stocks are chosen as a constraint, since it requires a banning of all projects and policies impacting the natural capital stock.

As a way out of this problem, Pearce et al. suggest the use of shadow projects. These are the projects and policies designed to produce environmental benefits in terms of additions to natural capital to exactly offset the reduction in natural capital resulting from the developmental projects and policies. Daly (1990) has suggested some operational

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principles for maintaining natural capital at a sustainable level. For example, (i) in the case of renewable resources, set all harvest levels at less than or equal to the population growth rate for some predetermined population size, (ii) for pollution, establish assimilative capacities for receiving ecosystems and maintain waste discharges below these levels, and (iii) for non-renewable resources, receipts from non-renewable extraction should be divided into an income stream and an investment stream. The investment stream should be invested in renewable substitutes (biomass for oil). In a free market situation, there may not be adequate incentives for the economic activities to undertake shadow projects and following the operative principles described above, for maintaining the natural capital at a sustainable level within the pace of economic development.

The environmental regulation with the appropriate instruments and institutions could provide sufficient incentives for profit maximizing activities for the sustainable use of natural resources.

3.6 SUMMARY

Given the urgency of many macro-level and global environmental issues, together with the clearly inadequate state of current macroeconomic theory, it appears that the time is ripe for a reassessment of macroeconomic theory and policy. This reassessment could draw on some mainstream approaches, especially the New Keynesian variety as well as more radical Keynesian or ecological perspectives. With this view various concepts related to micro economic policy in context of environment have been discussed in the unit. Integrated Environmental-Economic accounting was described as it provides a way of structuring information that allows decision makers and others to gain new insights into public policy issues. It enables to systematically analyse the impact of the environment on the economy, and vice versa. Finally the concept of environmentally corrected GDP was explained. With this approach Production and use accounts at the sector or macro level could be prepared by simply adding the firm-level production and uses of fossil fuels or minerals or ores.

3.7 FURTHER READINGS

Baumol, W.J. and Wallace E. Oates (1994), The Theory of Environmental Policy, Cambridge University Press.

Christensen, P.P. (1989), Historical Roots for Ecological Economics-Biophysical Versus Allocative Approache, Ecological Economics. Vol. 1, pp. 17-36.

Daly, H. (1990), Commentary: Toward some operational principles of sustainable development, Ecological Economics, Vol. 2, pp 1-6.

Dasgupta, P. and K.G. Maler (1998), Decentralisation Schemes, Cost-Benefit Analysis, and Net National Product as Measure of Social Well Being, The Development Economics Discussion Papers Series No.12, LSE, STICERD.

Freeman, III, A.M. (1993), The Measurement of Environmental and Resource Values: Theory and Methods, Washington D. C: Resources for the Future.

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